11 Apr 2017

Economics terms everyone should know

This piece on "5 economic terms we should all use" got me thinking on what I think people should know. Here are a few to get started.

Opportunity cost: The cost of doing something in terms of time and money.

Examples: If you watch one movie, you cannot watch another. If you date one person, you cannot date another. If you go to one school, you cannot attend another. If you spend money today, you don't have it tomorrow (and may need to work more to get it!)

Risk versus uncertainty: Risk can be described in probabilities. Uncertainty cannot.

Examples: Life or car insurance fit risk models, so it's easy to find "fair" prices that reflect your risk and therefore insure you against premature death or accident. When it comes to climate change (or going on a blind date!), there are possibilities rather than probability, so you need to prepare for the worst and hope for the best. That's why there's no insurance for bad dates -- or climate change!

Average fixed cost: The upfront cost of a good or service divided across its useful life.

Examples: My phone costs $600, but that's less than $1/day if I use it for 2 years. If I spend 10 hours learning how to do my taxes when I am 25, I can use that knowledge for the rest of my life to save on accountant fees (as well as having a much better idea of how the government "thinks" and how to track my finances).

Value vs price: The value is what it's worth to me. If that's greater than the price cost to me in time, money, etc., then I should buy it -- assuming there are no better things to buy (opportunity cost!)

Examples: This bike is worth $400 to me but it's priced $200. The seller may only value it at $100. We bargain and agree on $150. Both of us are better off. The bike cost me $150 but I value it at $400, so that's how sad I'd be if it was stolen.

What do you think of these words, definitions and examples? Got any more to discuss?


Mabs said...

A couple more terms to add to your list:
- Externalities
- Use and non-use value

"The value is what it's worth to me"
But value may or may not be measurable in $ terms. If it's not then "If that's greater than the price, then I should buy it" doesn't make much sense. The example you gave sounds more like consumer/producer surplus.

David Zetland said...

Thanks for the clarification on "price," which I was not clear on (I agree with your comment). I will blog on the other terms soon :)

TJ said...

"comparative versus absolute advantage"

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